United States of America there is much debate over the future prospects of industries ... unreasonable presumption given the age and quality of US steel plants.
Environment and Planning A, 1987, volume 19, pages 711-714
Editorials
Guest editorial: The ghost of John Maynard Keynes Keynes (1936) explained how and why capitalist economies become ensnared in high-unemployment 'equilibrium' traps. His analytical tools were Marshallian economics coupled with a radical conception of uncertainty. His perspective was what we might now term as 'realist'; the apparent horrors of the great depression had to be comprehended. For Keynes, theoretical formalism had one purpose: to educate the policymaking elites about policy options, blind alleys, and the best avenues for economic prosperity. In this respect, he was the most accomplished economic policy analyst of this century [see Skidelsky (1983) for an assessment of Keynes's motivations and ambitions with regard to economic policy and other issues]. One part of his analysis dealt with money wage policies, especially wage-reduction policies. At the time, he was fighting the Treasury view that lower wage rates would induce an expansion in the demand for labor. The Treasury view was based on Say's law which assumes overproduction to be impossible. Many of us are familiar with his argument. For those who have temporarily forgotten, the gist of his argument went as follows. In a perfectly competitive economy, any firm that reduces its wage rate in relation to other competing firms would have a competitive price advantage in the marketplace. As a consequence of lower goods' prices, the demand for labor of that firm would go up as it receives more orders for its products. If all firms in that industry reduced prices through lower wages, this may also stimulate a higher demand for labor through a price-induced expansion in demand. All this is very reasonable and 'good' economics. Keynes also pointed out, however, the fact that a firm's or industry's lower wage policy was not an appropriate wage policy for the economy as a whole. Very simply, reducing the wages of all workers would just impoverish the whole economy. The only reason such a policy works at the level of the firm is that aggregate consumer spending power is maintained by other firms' stable higher wages. There are, of course, more subtle factors involved, especially as regards workers' and firms' heterogeneous price expectations. Moreover, sustaining the spatialtemporal coordination of individuals' decisions and expectations may be nearly impossible as the economy bounces from one crisis to another. According to Keynes, the capitalist economy is a delicate machine, inherently unstable, and characterized by radical uncertainty. Of course, one must be cautious about characterizing Keynes's views on these matters. It is doubtful if Keynes was so pessimistic about the capitalist system as a mode of production (compare with Morishima, 1984). He was a liberal reformer, not a socialist radical. It is more likely that he doubted the abilities of those Treasury officials charged with the responsibility of regulating the economy. In this context, he thought Treasury officials to be singularly ill-informed about the workings of the economy, and dominated by the views of economists long dead. All this is very well known. Or it should be well known. But unfortunately, there seem to be many contemporary instances where Keynes's views are ignored, even rejected. This seems especially the case amongst local economic development policymakers, and amongst those who have responsibility for economic growth policy (sometimes called international trade policy). In these instances, the ghost of Keynes has been pushed aside in a rush to gain temporary price advantage for places, firms, industries, and whole economies. Just consider the following two examples.
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In Pittsburgh it is commonly argued that the drastic decline of local manufacturing was a result of high union wages. There is much debate over the relative contribution of high union wages versus other factors, such as the dumping of foreign products, low levels of investment in domestic plants, management ineptitude, etc. As well, it could be argued that high union wages were the result of the decline in manufacturing employment (in the sense of wages being a final payment to labor before total closure), as opposed to the cause of decline. Whatever the role of high union wages in industrial decline, since 1979 over 100 000 jobs have been lost in local manufacturing, and there appears to be no end in sight to retrenchment. At the same time, overall employment in the local economy has actually grown slightly over the past few years so that in 1986 there were more people employed in Pittsburgh than ever before. It will not be a surprise to anyone to learn that the 'new' jobs have come from service sectors. Given these patterns, the lessons drawn by local policymakers seem to go as follows: high union wages caused the decline of manufacturing, low nonunion wages caused the growth of service employment; thus, if local manufacturing jobs are to be preserved, union workers must take substantial wage and benefit cuts. What appears lost in this 'analysis' is the plain fact that the volume and diversity of service jobs in Pittsburgh is owed to high union wages. Without union wages and benefits, the local economy would be a mere shadow of its current form and structure. The average Pittsburgh service job pays much less than half the average union manufacturing job. Furthermore, layoff benefits of union workers, so important to the local economy in recent years, often pay as much as jobs in fast food stores. To then imagine a local economic development program which has as one of its policies the reduction of union wages and benefits is amazing. It might be argued that there is no other alternative, that those with manufacturing jobs will lose them unless they take substantial wage and benefit cuts. This may be the case. Nevertheless, it is highly unlikely that such a policy would benefit the local economy. In fact, 'saving' local jobs by lowering manufacturing wages would have profound negative consequences for those immediately affected, and the local economy at large. This example can be extended to the national and international economy. In the United States of America there is much debate over the future prospects of industries such as steel, autos, chemicals, textiles, electonics, indeed all manufacturing sectors. The problems of these industries are many, but often involve price competition from foreign manufacturers. For instance, there is a worldwide glut of steel. The US economy has been flooded with steel from Third World countries with wage rates of around $3.00 to $5.00 per hour. The governments of these countries appear more than willing to dump steel on the US market at prices well below the cost of production, so they can earn needed US dollars to repay US banks. This 'problem' has elicited a number of possible solutions from the US federal government. One proposed 'solution' is for these industries to reduce their wages while improving productivity. The idea is that domestic firms should be able to compete with imports by virtue of their higher relative economic efficiency. But no one knows by how much wages have to be reduced to be competitive. In fact, there are some commentators who believe that the ultimate competitive efficiency wage is the lowest Third World wage plus the cost of shipping steel from across the world (a market solution reminiscent of von Thunen). Implied here is a presumption that foreign competitors are just as efficient as US producers, not an unreasonable presumption given the age and quality of US steel plants. For the US economy as a whole, though, there is another implication. If manufacturing wages are to be so drastically reduced, the domestic market for
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service products will also drastically shrink. Whereas the US economy led the world in the creation of service employment over the past decade, it could also lead the world in the destruction of service employment over the next decade. For the world economy, there is an even more sobering implication. Over the past decade, the US economy has become the marketplace for the export firms of many countries. European, Latin America, Asian, and many other spheres of the world economy have sought refuge in the US market as their own markets have stagnated and declined. Collapse of high-wage manufacturing jobs would starve the US service economy and could lead the rest of the world into economic depression. This is, perhaps, an extreme scenario. Even so, I think it is quite plausible. It is made plausible by a new generation of policymakers who have forgotten Keynes's lessons about the impossibility of Say's law. From the community through to the international economy, the simplest macroeconomic experiments have profound implications for how we ought to understand our current conditions. And yet it appears as if textbook neoclassical microeconomics have captured the intellectual heart of this new generation. One can only hope that the ghost of Keynes stalks their imagination. G L Clark References Keynes J M, 1936 The General Theory of Employment, Interest, and Money (Macmillan, London) Morishima M, 1984 The Economics of Industrial Society (Cambridge University Press, Cambridge) Skidelsky R, 1983 John Maynard Keynes, Volume I: Hopes Betrayed 1883-1920 (Viking Press, New York)
Editorial: August Losch and the Field of Urban and Regional Research Professors Rolf Funck and Antoni Kuklinski recently made an enormous contribution to the field of regional science, and more generally to regional research, through the publication of Space-Structure-Economy: A Tribute to August Losch. This volume contains, in the form of eighteen essays by international authors of high distinction, accounts of Losch's seminal work and its influence and impact on current research nearly fifty years after publication of the first edition. The volume also includes a touching remembrance of Losch's personal and academic life up to 1940 by Professor Wolfgang F Stolper. Any scholar with even a minor interest in location or spatial theory will want to acquire this volume for his or her library. The Funck and Kuklinski volume serves to remind us once again that the field of urban and regional research has a rich heritage of immense strength and diversity. In our seemingly harried careers, preoccupied with our present day concerns, we tend to forget the arduous circumstances under which scholars such as August Losch labored to produce works of so much significance and relevance that they speak to us as if they were written only yesterday. In our writings nowadays we tend to dismiss as routine or even unnecessary the relation of our research findings to what has come before. Our literature reviews are often a relatively dull recitation of related references. How much more beneficial they would be if an attempt was made to describe and interpret in what fashion these results were discovered or invented and whom we should credit for the principal breakthroughs. To their credit, several of the authors in the Funck and Kuklinski volume have performed this task superbly, in some cases even to the extent of criticizing their own early contributions. The Losch Tribute also reminds us that the field of regional research with its several schools of thought possesses a dynamic character and scholarly standing that extends far beyond its occasional policy relevance. The recently published
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Handbook of Regional and Urban Economics (Nijkamp, 1986) is another reminder of the generally sound condition of our field. Although interest in specific research topics will always wax and wane, there seems little danger that the field itself will stagnate or that it will be replaced by one based on an entirely different viewpoint. At least, not so long as scholars such as August Losch are available to inspire our efforts. D E Boyce References Funck R H, Kuklinski A (Eds), 1986 Space-Structure-Economy: A Tribute to August Losch (von Loeper Verlag GmbH, Kiefernweg 13, 7500 Karlsruhe 31, FRG); distributed in the USA and Canada by the Kober Press, PO Box 2194, San Francisco, CA 94126, USA Losch A, 1940 Die rdumliche Ordnung der Wirtschaft first edition (Gustav Fischer, Jena); second edition, 1944; third edition, 1962 (Gustav Fischer, Stuttgart) Losch A, 1954 The Economics of Location translated from the German original by W H Woglom, W F Stolper (Yale University Press, New Haven, CT); second printing, 1967 (John Wiley, New York) Nijkamp P (Ed.), 1986 Handbook of Regional and Urban Economics (North-Holland, Elsevier, Amsterdam)
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